Netflix (NFLX 0.04%) shares sold off following its first-quarter earnings report earlier this month. A combination of factors spooked investors, including a forecast for slower growth in Q2 and news that Netflix co-founder Reed Hastings was stepping down from the company's board of directors. The decline took the stock from outperforming the market before the report to underperforming it.
With shares in the red year to date and meaningfully trailing the S&P 500, is this a buying opportunity?
Unfortunately, even though the business is still doing great and has a long runway thanks to its pricing power and its fast-growing but still nascent advertising business, I just can't get behind a bullish outlook for the stock at this price. In other words, I love the business but not the stock -- at least not at this price.
Image source: The Motley Fool.
A solid quarter, but softer guidance
Netflix's first-quarter results were impressive.
Its first-quarter revenue rose 16% year over year to about $12.3 billion, putting the figure slightly ahead of management's forecast for the period. And operating income climbed 18% to $4.0 billion, as the company's operating margin expanded to 32.3% from 31.7% in the year-ago quarter. Further, Netflix's free cash flow jumped to $5.1 billion, helped along by a $2.8 billion cash receipt tied to the terminated Warner Bros. Discovery transaction.
But as is often the case with Netflix, the guidance is what moved the stock.
Management called for second-quarter revenue of about $12.6 billion, implying 13% year-over-year growth -- a clear deceleration from the 16% pace the company just delivered. Further, management said its operating margin is also expected to narrow year over year in Q2, contracting from 34.1% in the second quarter of 2025 to 32.6%, with content amortization growth peaking in the period before easing in the back half.
And the company's full-year 2026 guidance was left unchanged: revenue of $50.7 billion to $51.7 billion (12% to 14% growth) and an operating margin of 31.5% -- up from 29.5% in 2025.
Then there's Hastings.
The co-founder, who handed off the CEO role in 2023, will not stand for reelection when his term expires at the June annual meeting.
Co-CEO Ted Sarandos pushed back during Netflix's first-quarter earnings call on speculation tying the move to potential disagreements regarding the abandoned Warner Bros. Discovery deal.
"Reed was a big champion for that deal," the CEO explained. "He championed it with the Board. The Board unanimously supported the deal. So we had perfect alignment with management and the Board on the Warner Bros deal."
In short, Netflix management insinuated that Hastings's departure shouldn't be viewed as a red flag.
Pricing power and ads
Further, Netflix boasts two major catalysts -- and those catalysts continue to perform well.
Those catalysts, of course, are the company's ability to regularly raise prices (its pricing power) and its fast-growing advertising business.
The company is once again reminding investors of its pricing power, having raised prices in March.
"Our recent price changes have gone well, reflecting the strong value we provide members," the company said in its first-quarter shareholder letter.
Co-CEO Greg Peters added context on the company's approach to price increases during the earnings call: "Occasionally, when we've added more value, we ask our members to contribute more so that we can invest that into delivering them even more entertainment value."
This ability to regularly increase prices is a growth driver that should persist not just for years, but arguably for decades.
And the advertising business, which is only about three years old, is the other lever.
Netflix reiterated that it is on track to reach roughly $3 billion in ad revenue this year -- double the 2025 level. Additionally, Netflix said its advertiser count rose 70% year over year to more than 4,000, and the cheaper ad-supported plan accounted for over 60% of sign-ups in countries where it is offered during Q1.
NASDAQ: NFLX
Key Data Points
So, why not buy Netflix stock now?
Because Netflix is decelerating into what the company itself describes as an "intensely competitive" market -- one that includes well-capitalized tech giants with their own streaming services and traditional media companies simultaneously migrating their businesses from linear TV to streaming. Then there are other forms of entertainment competing for user attention -- namely, social media platforms.
Finally, the stock's valuation is arguably a bit stretched. With a price-to-earnings ratio of 30 and a forward price-to-earnings ratio in the high twenties, there's little room for unexpected challenges, such as a slowdown in user growth or a deterioration in Netflix's pricing power.
At what price would I buy? If Netflix shares fell to the point that the price-to-earnings ratio was in the mid-twenties, I'd be interested.
Until shares get there (if they ever do), I'm content to wait.
